Professional Documents
Culture Documents
2d 900
63-2 USTC P 9797
The debenture notes were unambiguous obligations to pay the face amount at
maturity with interest payable semi-annually.2 The debenture notes were
carried as debts on the records of the taxpayer. The uncontroverted testimony
was that the contributions to common stock represented the amounts of risk
capital that the organizers were willing to contribute to the venture and the
debenture notes represented loans to the taxpayer.
The debenture notes were made subordinate to all other indebtedness of the
taxpayer, whether such indebtedness was secured or unsecured and whether it
was existing when the notes were issued or arose thereafter. The resolution
authorizing the issuance of the debenture notes provided that no interest or
principal on the notes was to be paid if the taxpayer was in default in the
payment of either principal or interest on any other corporate indebtedness.
Upon liquidation the noteholders would be paid only after all other creditors
had been paid.
The taxpayer has the burden of demonstrating that the deductions on account of
interest come within the purview of 163(a). 4 The substance rather than the form
of the transaction is controlling.5 Each case turns on its own facts.6
Recognizing that intent of the corporation and of those who contribute financial
support to it are important and that the ratio of debt to equity capital is not
decisive, the subjective expressions of intent must be weighed against the facts
which support contrary inferences.10 Among such facts are the identity of
interests between stockholders and noteholders11 and the proportionate holding
of stock and notes;12 the fact that the proceeds from the notes were used to
supply capital assets in that they were used to complete construction and pay
off other indebtedness;13 the subordination of the notes to all other
indebtedness of the taxpayer;14 and the assumption of the risks of the venture
by the noteholders.15
Our decision in Bowersock Mills & Power Co. v. Commissioner, 10 Cir., 172
F.2d 904, is not controlling here. There, emphasis was laid on the fact that prior
to the pertinent transactions the parties stood on the basis of debtor and creditor
with no disposition on the part of the creditor to become an investor in the
corporaton.16 Bowersock itself recognizes that 'every case turns on its own
facts.'17
10
A review of the entire record discloses that substantial evidence sustains the
findings of the trial court and that the inferences which that court drew from the
evidence are reasonable. Neither a choice between two permissible views of the
weight of the evidence18 nor a choice between conflicting reasonable inferences
from the evidence19 is clearly erroneous. The taxpayer has failed to sustain the
burden of proving that the payments in question are deductible as interest under
163(a).
11
Affirmed.
Originally the debenture notes were issued in the amount of $67,003.20. Later,
Originally the debenture notes were issued in the amount of $67,003.20. Later,
additional contributions of $2,615.20 were made to common stock and
$10,460.80 to debenture notes. The 4 to 1 ratio was changed insignificantly
when two stockholders disposed of their interests and an eighth individual
joined the corporation
The original debenture notes matured in 1966 and bore 4% Interest. In 1960
new notes were exchanged for the original notes. The new notes matured in
1970 and carried 6% Interest. Through oversight, interest was paid annually for
the first two years rather than semi-annually
26 U.S.C. 163(a)
Charter Wire, Inc., v. United States, 7 Cir., 309 F.2d 878, 880, certiorari denied
372 U.S. 965, 83 S.Ct. 1090, 10 L.Ed.2d 129
Brake & Electric Sales Corporation v. United States, 1 Cir., 287 F.2d 426, 427;
P.M. Finance Corporation v. Commissioner, 3 Cir., 302 F.2d 786, 789
Bowersock Mills & Power Co. v. Commissioner, 10 Cir., 172 F.2d 904, 907
See Bowersock Mills & Power Co. v. Commissioner, supra, 172 F.2d p. 907
See Kraft Foods Company v. Commissioner, 2 Cir., 232 F.2d 118, 126-127
See Bowersock Mills & Power Co. v. Commissioner, 10 Cir., 172 F.2d 904,
907
10
11
Wachovia Bank and Trust Company v. United States, 4 Cir., 288 F.2d 750, 756
12
Charter Wire, Inc., v. United States, 7 Cir., 309 F.2d 878, 880, certiorari denied
372 U.S. 965, 83 S.Ct. 1090, 10 L.Ed.2d 129
13
14
15
Commissioner v. Meridian & Thirteenth Realty Co., 7 Cir., 132 F.2d 182, 186
16
17
18
United States v. Yellow Cab Co., 338 U.S. 338, 342, 70 S.Ct. 177, 179, 180, 94
L.Ed. 150
19
Continental Petroleum Co. v. United States, 10 Cir., 87 F.2d 91, 95, certiorari
denied 300 U.S. 679, 57 S.Ct. 670, 81 L.Ed. 883; Walling v. Rutherford Food
Corporation, 10 Cir., 156 F.2d 513, 517, affirmed and modified 331 U.S. 722,
67 S.Ct. 1473, 91 L.Ed. 1772